ETON Advisors Newsletter - April 2018

The Tug-of-War Continues

After remaining dormant for most of 2017, market volatility returned with a vengeance in the First Quarter of 2018. Concerns over rising interest rates and inflation overcame positive news on economic growth and corporate earnings, triggering a selloff in both bonds and stocks in early February. The VIX index of implied equity market volatility spiked, startling some investors who had become complacent about downside risk:

After declining by over -10% (the traditional definition of a market correction) from its late-January high, the S&P 500 regained roughly two-thirds of its lost ground in mid-February, zig-zagged in late February and early March, then sold off again in late March.

This recent volatility should be viewed, in our opinion, as evidence of the ongoing tug-of-war between positive economic growth on the one hand and the Fed's less accommodative monetary policy (with its attendant rising interest rates) on the other.

Economic Tug of War

Whether the positive impact of economic growth will exceed the negative impact of rising interest rates and declining liquidity is the major question facing investors.

While recent market gyrations are distracting for everyone and potentially damaging for many, normalized interest rates and volatility are overall healthy for long-term investors who are patient in deploying their capital and who periodically rebalance their portfolios back to strategic targets. For these investors, day-to-day market fluctuations need not derail one from achieving long-term goals.